WE DODGED THE THIRD QUARTER BULLET
As all of you know from our interim letters in July, August and September, cash largely has been our investment choice of necessity in this environment, and we have kept it in short dated US government securities.
“INVESTING IN AN UNCERTAIN WORLD”
Wild price swings slowly erode investors’ confidence in the marketplace. The proximate cause of this volatile market is neither the Euro zone crisis nor the ambiguity of our domestic growth trajectory although they both contribute. We believe, the erratic moves we have been seeing in the markets are made and exaggerated by intraday reweighting of leveraged ETF’s and by the disproportionate impact price momentum based high frequency trading strategies are causing.
For a myriad of reasons (Europe, lack of effective government policy, US economy, China slowdown, to name a few), we are forced to pursue a more defensive and conservative approach. We believe investors should wait to see whether policy makers (both here and in Europe) can be effective in formulating a coordinated and credible solution for Europe and at home before taking on more risk. The uncertainty caused by the lack of clarity (again both here and in Europe) and the extreme volatility, has kept us mostly on the sidelines.
Our best recommendation is to keep a cool head and avoid volatility. The opportunities will and are returning. Patience is our byword, and we continue to look for appropriate opportunities. In that regard, we are beginning to think that we are closer to the end than the beginning of this market fiasco. We think that the opportunities to gain safe, reasonable returns will return to the market (with much less volatility), and we plan to be positioned to take advantage of them
WHAT WE ARE DOING
In the near term, we believe that higher than normal cash positions are still warranted. We are focusing on investments in areas where the fundamentals remain healthy and potentially attractive. Given slowing global economic growth and significant uncertainty surrounding the European sovereign debt crises, we believe it is wise to take a conservative and defensive stance.
The lack of policy coordination and a unified front in Europe combined with increasingly stretched sovereign balance sheets in the developed world are proving to be significant challenges for the global economy. It also suggests politics may increasingly influence outcomes, financial markets, and the economic outlook. In our opinion, the effectiveness of policymakers should also be questioned. Fiscal and monetary stabilizers appear to have become less useful in a world which continues to lack confidence, and faces significant uncertainty in developed economies, where aggregate sovereign debt levels remain elevated, and where fiscal stimulus is becoming less viable.
The combination of political, economic and policy implementation risks all cause us to maintain a conservative defensive approach. We believe investing in a world of heightened uncertainty means maintaining higher cash balances than normal, focusing investments in areas with strong fundamentals and balance sheets, and staying defensive in non-cyclical sectors as well as in investments senior in the capital structure. When looking to increase risk, we will remain patient and continue to focus on select investments where fundamentals remain supportive; such as equity and debt in select multinational companies, corporate debt, high quality municipal bonds, and precious metals along with treasuries.
As the market fluctuates in the coming weeks and months - this cyclical phase has yet to become fully extended in our view - we will be working hard to seek out the appropriate investment vehicle. It sure feels good to know we have the dry powder on hand to do just that.
Please feel free to call us at any time if you have any questions.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
